skycfa

1) P/E
Example : 10/5 = 2 (low; hence value stock), 15/5 = 3 (higher; Market average)

Comment: With the same level of earnings (5) the price is lower (10) compared to 15 (industry average)

Reason (why would this happen): The numerator (P) is based on "Future/Projected" earnings (Gordon growth model) while the denominator (earnings per share) reflects historical performance. An unfavorable future outlook in earnings can depress the price even with same "current" earnings which leads to lower price multiples. Reasons for depressed future "expected" earnings can be seasonality/M&A which in time will correct and earnings will return to risk adjusted industry average resulting in a higher price multiple.



2) Same logic goes

For same level of earnings price can be higher due to higher (than industry average) "expected" earnings which results in high price multiple (growth stock). BUT if growth does not materialize than the multiple will revert to industry average (risk of price multiple)

Hope it helps